More money for defense, now fix the process

The Minister of Finance was rather generous. The new defense budget is touted as the first double-digit jump in India’s defense spending in decades, since its steady decline since 2017. At 2% of the budget, it sends a signal of strategic resolve in an extraordinarily turbulent world. Funds must be used wisely and quickly, which requires systemic change, not tinkering, in the budget process. With the “enemies” increasing and the fragile “rules-based order” collapsing, there is no time to waste.

Good and evil

The most discussed aspect is the budget increase of 15% to 2% of GDP (up from 1.9% last year). Second, in a notable turnaround, capital spending exceeded revenue budget, rising by more than 22%, reversing years of neglect. Third, there is a clear trend towards modernization. The Indian Air Force gets a huge increase of 32%, while the Indian Army gets a 30% increase in heavy vehicles and weapons.

Surprisingly, the Indian Navy, with its ambitious commitments in the Indian Ocean, receives 3%. Ironically, this may be due to its success in localisation, and its proven ability to absorb allocated funds.

This is all good. But the rupee has fallen significantly against the dollar, which means paying for capital goods such as aircraft has become more expensive. It’s not all bad news. Defense exports are on the rise – Rs 23,000 crore last year against Rs 1,000 crore in 2014. A major chunk of the Indian Army’s mobility equipment is manufactured here by Tatas, Ashok Leyland and others. But this does not affect the “double-digit” increase.

There are also pension payments, which rose by 6.56% but are still at 21.84% compared to 27.95% for capital expenditures from DoD appropriations. Before the financial years 1987-88, they were under central government pension and were not included in the defense budget. Despite this, the budget remained 3.31% of GDP. The size of the economy then was less than half of what it is today, but it still offers some perspective.

Maybe it’s time to reinvent that wheel.

Bureaucracy and delays

A welcome aspect is that 75% of the capital acquisition budget for procurement has been allocated to local industries, which includes private companies. The government’s trend in this direction has been consistent, with defense production recording a 174% increase from 2014 to 2015. But beyond that there is the reality of a complex bureaucratic system, one aspect of which is the L-1 (lower cost) rule that favors large industries rather than the innovators who are vital to a technology-intensive industry. They cannot compete, especially when shifting to manufacturing. This needs not only hand-holding, but also clarity in future planning and promised volumes.

The next factor is the endless delays in vital programs such as the Project 75 submarine approved in 1997. Expected delivery times are now in the mid-2030s. The Rafale fighter jet deal, which was conceptualized in the 1990s, saw results only in 2019-2020. It is not surprising, then, that the Defense Ministry will have to return Rs 12,500 crore of capital allocation in the financial year 2024-25.

It is time to reconsider the repeated demand for an irreversible defense modernization fund, which was announced in the FY04-05 budget speech but never implemented. Financial expediency cannot hold the defense industry hostage.

R&D is sparse

The main area is research and development (R&D). Funds for the Defense Research and Development Organization (DRDO) and a large number of research organizations were increased; Many of them have potential benefits for defense production. But research is fragmented. Although often dual-wielding, it rarely translates into better defensive capabilities. India’s total research budget also remains 0.66% of GDP. Compare that to Japan’s 3.70%, which is primarily privately financed. In India, there is an almost absence of research and development in the private sector. Big League participants must streamline and standardize their search and direction.

A “peaceful” country like Japan now allocates 2.2% to its defence. So did Australia, with a much lower threat level. Europe is also moving towards larger allocations. The issue here is the “guns versus butter” lens through which the defense budget is viewed. Instead, it should be integrated with the vision of Vixit Bharat’s $30 trillion economy. For example, the Border Roads Organization provides connectivity to the Vibrant Villages program which is vital to border development.

In another example, the Prime Minister pointed out that domestic shipbuilding has a multiplier effect of 6.5 on employment, with its multiple ancillary industries. This applies to almost all areas. The budget should be seen as a tool to promote growth, rather than a “non-development” department. Once this is done, the processes will follow.

Dushyant Singh, retired Lieutenant General, is currently the Director General of the Center for Land Warfare Studies (CLAWS). Tara Cartha is the Director of Research and Analysis at the Center for Land Warfare Studies (CLAWS).